CHICAGO - Michigan lawmakers late last week gave Gov. John Engler the Christmas present he was waiting for - passage of a plan to finance schools in the wake of a state law that eliminates more than $6 billion of school operating property taxes next year.

In a marathon session that began Thursday and ended Friday at noon, the House and Senate passed a two-part plan that would raise about $10.1 billion a year for elementary and secondary schools. The first part of the plan is a proposal that would be placed before voters March 15, and the second is a statutory plan that lawmakers could put into place if the ballot measure fails.

Engler had set a yearend deadline for coming up with a plan to replace property tax revenues for school operating purposes. In July, the Legislature eliminated the tax in an attempt to bring long-sought property tax reform to Michigan, while leaving the property tax levy for school debt service intact.

In a statement released Christmas Eve, the Republican governor called the plan "a win-win strategy for all the citizens" of Michigan.

For the first time in a generation, we have achieved significant school reform and kept the promise of permanent property tax relief," Engler said. "Students, parents, teachers, and taxpayers are winners because of this historic accord."

Nick Khouri, Michigan's chief deputy treasurer, said Yesterday that the governor is expected to sign some of the legislation as early as this week.

Khouri said that schools "are fully funded" under both the ballot and statutory plans.

The cornerstone of the ballot plan is an increase in the state sales tax to 6% from 4% to raise $1.8 billion a year. The ballot plan would also levy six property tax mills on homes and 24 mills on nonresidential property to raise another $2.4 billion - less than what home owners and businesses are currently paying.

A 2% real estate transfer tax would raise another $426 million a year beginning in January 1995, while legalizing the game of Keno would raise another $100 million annually for education. Other measures include an expansion of the interstate telephone tax to raise $60 million and a higher cigarette tax that would raise $357 million.

The ballot Proposal would drop the state's income tax to 4.4% from 4.6% for a revenue loss of about $247 million. A property assessment cap of 5% or the rate of inflation, whichever is less, starting with calendar year 1995 tax bills, is also included in the ballot plan.

The statutory plan, meanwhile, would not include a sales take increase, which must be approved by voters under the state's constitution.. However, the plan would increase the state income tax to 6% from 4.6% to raise $1.7 billion a year.

The state's single business tax would also see an increase to 2.75% from 2.35% to raise $335 million. A 1% real estate transfer tax, effective in May, would raise $213 million, an interstate telephone tax would raise $40 million, and a cigarette tax would raise $127 million.

Property taxes totaling 12 mills on homes and 24 mills on nonresidential Property would raise another $3 billion under the statutory plan.

Khouri said both plans call state general find budget cuts of high as $300 million to $400 million in fiscal 1995, which begins Oct. 1.

Patti Woodworth, Michisan's budget director, said yesterday that the Legislature did not identify any specific budget cuts. She added that lawmakers will use a $7.5 billion budget proposed by Engler on Dec. 14 as a blueprint for making cuts.

If voters defeat the ballot proposal, the statutory plan may be in for some changes. One state official said discontent among some Senate members could lead to revisiting in in the single business and income taxes under the statutory plan.

In a press release, Senate majority leader Dick Posthumus, R-Alto, said he will begin a campaign against the income tax increase in order to convince voters to support the ballot plan.

Tax increment financings district, which were facing a possible $35 million shortfall in debt service in 1994 without school operating property taxes to capture, would be given some relief under both the ballot and statutory plans.

Khouri said that under the ballot plan, the Legislature would have to appropriate any shortfall faced by the districts for existing obligations. Under the statutory plan, tax increment districts would still be able to capture the revenues they need from school mills for project that exist as of March 15 or that are underway.

Last month, Standard & Poor's Corp. Placed nearly $92 million of tax increment debt issued by districts in Detroit and the city of Lapeer on CreditWatch with negative implications because of the property tax repeal.

State revenue sharing to local governments was spared in the final plan. Engler had proposed eliminating more than $700 million of state revenue sharing to local governments and replacing it with two to six property tax mills.

The use of capital appreciation bonds by school districts was also left intact by lawmakers. In November, the Senate passed legislation would have essentially curtailed the issuance of the bonds by school Khouri said he still believes their use has been abused by some district and that the state will review the matter in 1994.

Don Elliott, a vice president at A.G. Edwards & Sons in Okemos, Mich., which underwrites a large share of school capital appreciation bonds, said he is willing to "sit down with the Treasury Department and come up with something without throwing the baby out with the bathwater."

Steve Murphy, a director at Standard & Poor's, said yesterday that the tax cut to home owners and businesses in Michigan could result in increased economic activity. However, he said, cutting $300 million to $400 million from the budget after three straight years of budget cuts "is going to be tough to do."

Woodworth said that higher-than-estimated revenue collections, coupled with some expenditures contained in the proposed fiscal 1995 that may no longer be needed, could make cutting the budget easier.

Jeanne Wilson, a senior analyst at Moody's Investors Service, said yesterday that it is premature for the agency to comment on the plan. In July, the agency had warned that the ratings of 60 school districts are at risk because the Legislature eliminated school property taxes without identifying replacement revenues.

Officials from Fitch Investors Service could not be reached for comment.

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